What is the spot price? Definition and meaning

The spot price is the price quoted for a purchase that has go ahead now – on the spot. The purchaser has to pay for it now, and the seller has to deliver it immediately. It is the current market price at which something – such as a security, commodity or currency – is purchased or sold for immediate payment and delivery.

A security, currency or commodity’s futures price, as opposed to its spot price, is its expected value at a specific time and place in the future.

The spot price is important because it is the price at which purchasers and sellers agree to value a tradable asset.

However, spot prices become a considerably more important concept when considered in the $3 trillion derivatives market.

Spot prices change all the time – they go up and down, depending on levels of supply and demand. To minimize the risks associated with continuously fluctuating prices, investors have created derivatives, such as futures, options and forwards, which allow purchasers and sellers to ‘fix’ (lock in) the price at which they trade an asset in the future.

“The price quoted for a transaction that is to be made on the spot, that is, paid for now for delivery now. Contrast spot markets with forward contracts and futures markets, where payment and/or delivery will be made at some future date.”

“Also contrast with long-term contracts, in which a price is agreed for repeated transactions over an extended time period and which may not involve immediate payment in full.”

Spot price in a futures contract

Spot prices in the financial markets are most often referenced in relation to the price of a commodity in a futures contract – perhaps for gold, wheat, oil, etc.

Investors calculate a futures contract price by looking at a commodity’s spot price, expected supply and demand changes, the risk-free rate of return for the commodity’s holder, and its storage and transportation costs in relation to the contract’s maturity date.